Government Backing for Solar Firms Remains an Economic Drag

Lachlan Markay /
October 17, 2011

The economic damage inherent in federal backing for solar power companies extends beyond Solyndra-style bankruptcies, in which taxpayers pour money into unprofitable but politically popular ventures. Even where government-backed companies stay afloat, federal intervention directs resources to less productive and profitable activities.

Some solar power companies based in California are succeeding where Solyndra failed (that is, staying in business), due primarily to the state’s renewable energy mandate and restrictions on cheap energy. But while the companies have received significant backing from the federal government, taxpayers are potentially on the hook for $28 million per permanent job created.

But the costs exceed even potential taxpayer losses. The federal government’s incentives for investment in the industry – which, the companies acknowledge, attracted investors who would otherwise have steered clear of solar – have diverted more than $7 billion in financing to the solar industry. That means less available financing for companies that do not enjoy solar’s government backing.

In all, the $7 billion in federal loan guarantees went to financing six California-based solar companies, the Los Angeles Times reports, to create a mere 250 permanent jobs. The six companies have capitalized on California’s renewable energy standard and restrictions on fossil fuels to secure a government-mandated market share in the state.

This year, state lawmakers and Gov. Jerry Brown approved legislation requiring all private and municipal electric utilities to get at least one-third of their power from non-fossil fuel sources by 2020. The so-called renewable portfolio standard is expected to help California meet a legal mandate to cut carbon dioxide and other greenhouse gas emissions linked to global warming to 1990 levels by the end of the decade. The law calls for an 80% decrease by mid-century.

Electric utilities in California see commercial-scale solar, wind and geothermal plants as the fastest way to comply with the state’s tough standards. They’ve signed numerous contracts with developers, who credit federal loan guarantees for helping them attract the private-sector capital they needed to launch. The renewable sector was hit hard by the U.S. financial crisis; a number of start-ups had difficulty getting financing.

The renewable sector was hit hard because it generally makes for risky investments (as Solyndra so clearly shows). As Heritage’s Nick Loris explained, “if wind energy could compete in the market and provide consumers with cheap electricity, it wouldn’t need a mandate that forces production.” The same goes for solar. The credit crunch has spurred banks to reduce their risk on their books, which means shedding investments less likely to produce significant returns.

Government loan guarantees, though, serve to reduce risk for lenders by offloading potential losses onto taxpayers, and making investment in solar more attractive. They remain risky investments, but investors themselves no longer need to shoulder that risk.

Realizing that their companies may not be viable without government intervention, the California solar firms the Times examined have dramatically stepped up their lobbying efforts. The two companies mentioned specifically – First Solar and Bright Source Energy – have, together, spent nearly $3 million on lobbying since 2007, according to the Center for Responsive Politics.

The economic losses of this government financing mechanism are three-fold. The clearest loss is the potential for another Solyndra. With more than $7 billion at stake, taxpayers are on the hook if any of these companies fails. And that remains a possibility: First Solar, for instance, has seen 68 percent decline in the value of its stock since February – from a high of $166 per share to under $54 today.

There is more subtle economic damage inherent in this program, though. As mentioned, government incentives skew investment towards some industries, and away from others. The $7 billion put into these six companies is $7 billion that will not go towards financing ventures that do not need either taxpayer backing to attract capital or repeated government intervention (in the form of mandates or further financing) to stay afloat.

The government-as-sugar-daddy investment model also diverts resources to unproductive lobbying activities. Money spent seeking federal handouts is money not spent building factories, hiring workers, or improving products. The potential for government backing makes those productive activities less attractive for a company, which can get off the ground simply by currying favor with Washington’s power brokers.

These loan guarantees will serve as a drag on the economy even if all of their beneficiaries stay afloat. The damage that federal intervention in the economy produces extends beyond Solyndra-style bankruptcies and ensuing taxpayer losses.